Episode 25: Succession planning and exit strategies

You’ve built a successful small business and it’s going well – but over the horizon comes retirement, a new venture, or a family concern. So how do you plan for your exit?

In this week’s episode of Xero In, we speak to business broker Kev Ryan about the many options available to small business owners when planning their exit, as well as what new business owners should look for when deciding to invest in an existing business.

If you’re thinking about selling up, getting out, moving in or investing, this is the episode for you. Tune in to hear tips and stories from Kev’s two decades of experience as a business broker.

RS: That’s right, Kev Ryan, founder of United BSM and he’s a business broker and a director focussing on the accounting industry. He’s pretty much the go-to person when it comes to succession planning and all things that involve exit strategies.

JVD: He’s tapped into this amazing vein of baby boomers who are essentially looking at retiring from their businesses in the next five to 10 years. Something like 70% of people running SMEs are looking to retire in the next decade. That’s an amazing number of people.

RS: Yeah, Kev’s a great person to talk to, he really does bring that human element to it and as he rightly says, every transaction is unique.

JVD: And he’s a very busy man, so we’ve actually got him dialling in from the road today. Let’s switch over to Kev.

JVD: We’re joined today by Kev Ryan who is the founder of United BSM. Thanks for joining us Kev.

KR: Thanks for having me.

JVD: I actually pulled up some figures from a PWC report and apparently there’s 1.4 million business owners that employ 7.9 million people in the Australian economy that are looking at exiting in the next five to 10 years.

KR: They are amazing stats. But the numbers are scary from a few points is how do they all, so the good percentage of those are boomers, so the timing for those as you say is in the next five years. Where are all the buyers coming from for all these businesses that are going to come onto the market?

JVD: So Kev, what are the top five exit strategies people have access to? Because in – I mean a couple of the reports I read just suggested that many of them just simply close down and the employees lose their job and the customers go elsewhere.

KR: Well I think you know, you – that is close the doors is probably my fifth point in – in the I think the way that it can go. You know, the first one is to not sell. If you’ve got a good team, you’ve got a business that you think can run under management and there’s that annuity type income continue on for a period of time, yeah, that can be some people’s utopia. The problem with that though is that if you’re actually looking to retire and travel around Europe for six months, any business owner will tell you that even when they’re not there they’re thinking about it, so.

There’s family succession which is probably your second of five main exit strategies.

Again, you know that – that brings up a whole range of issues and why a lot of people I think put off their succession planning, you know, process if you like even starting it is that they know that there’s going to be some hard conversations around the kitchen table because family dynamics can be…

JVD: Complicated [laughs].

KR: Oh very, that’s a good word, complicated. Third strategy for exit might be management buyout. Again, if you – if you say maybe run the business under management as a first step to phase in this step where the management is going to buy out with a team of employees or maybe backed by venture capital if it’s – if it’s a larger business. Obviously trade staff, if we can sell to a – a likely buyer within the industry or you might have a strategic buyer you know vertically or horizontally, you know synergistic buyers, that’s likely where most of this will go I think, but again, if you’re not starting early and grooming those potential buyers or understanding where the potential buyer’s going to come from, if you think it’s all going to happen in the last minute, you’ll – you’ll be sadly mistaken.

And the fifth one as we said, simply walk away shut the doors and – and sometimes when we’ve looked at businesses from a valuation point of view and have gone to market, it’s worked out that the owner is better just to keep running it for a couple of years and shut the doors and end up with the same, if not better, outcome from a cash perspective. And – and I think there’ll be a lot of good businesses that – that do that.

JVD: So tell us, Kev, too, what’s your background. You’ve clearly got a huge amount of passion and energy and enthusiasm for these small businesses and helping them go through an effective exit. Where – where did you first come into contact with small business and – and why the passion? Where does it come from?

KR: Yeah, well I’m a tax accountant by trade, that’s allowed me the interaction with small business, and from there I guess an interest in how does it all work and how can it be done better, how can you help people create something out of nothing or improve something that they’ve got and to really better their lives and I don’t want to get teary eyed about it, but the accountants, if they so choose are in a really unique place to help people.

My – my core niche opened me up to a baby boomer wave, and from there we got into, well how do we help people with succession and exit. So it’s been a 20 year journey. I’m only 40 so hopefully another 20-odd years. It’s a global opportunity now.

JVD: And tell me, when you – when you have a – an accountancy practice and you’re looking at retirement what are some of the issues that you – you need to take into account. What – what are some of the challenges that these people are facing?

KR: Yeah, I think the hardest thing if we were to look at exit strategies for accountants as a – as a specific niche because it is a little different to other types of businesses, is the fact that average accountant is a sole practitioner in the suburbs running what is really a micro type business from a turnover point of view where they are the business. In any business where the proprietor is really the face, the intellectual property and the arms and legs, deciding the value and an exit strategy process for them becomes very difficult unless they can replace themselves. So the biggest challenge for those guys is really letting go and handing over, you know, some client contacts and business management to the team.

RS: Can we – can we focus on that because obviously there’s goodwill that you create with your client book over time but then there’s also the cash flows associated with that book of clients. Where is the value weighted between the two?

KR: For me, the definition of goodwill within an accounting business is the right to work with a vendor to deliver client services into the future and beyond their transition. What that means is that, you know, the goodwill and cash flow really become hand in hand because you’re only really buying the ability to continue servicing that client base which generates that cash flow.

Looking at purchasing an accounting business, which are great businesses by the way for anyone to purchase if the you have the ability to – to deliver the service. Is really around, you know, how do we get that client base that’s used to, you know, John the accountant that’s been my accountant for 40 years and now go to Bill who is a new face and person I’ve never heard of before and there’s a process to that. There’s sometimes there’s skill involved but if you give yourself plenty of time like any succession planning or even a strategy time is the key. You know, start early and – and work where and how this is all going to transpire.

The best way that I’ve seen it work and we’re actually coining the phrase “merge to retire” where you can play, not just on the emotional side of the client base and team but also on the sole practitioner. You know, there’s a huge psychological piece to this whole thing.

So the idea of merging in, either, you know, sideways or up for the benefit of the client base and the team is normally the best way to transition.

What I’ve seen is that at the time of the coupling, you know, the corporate marriage if you like, the coupling, the terms of that deal are done pretty quickly and it’s at that point that you can manage your risk around it and it’s normally managed in the sale price.

JVD: What about people who are potentially coming in to become business owners, who are coming into these businesses, what should they be looking for in terms of the way the business functions and the strategy, the exit strategy that they’re effectively going to have to participate in?

KR: The biggest thing I would advise is to look at the time required and the risk around that time getting the business to a point where you would want it to be – and the – the reason I say that is that a lot of aging practitioners haven’t done a lot in the recent years to catch up with some of the changes that are happening in the industry and so as a – as a – as a person buying into a firm you have to look at the client base and it’s, I guess willingness to move on a journey that you might like to move on. So if you’re a 40 year old, you’ve got 20 years or more left, you’re buying a – a practice with an owner that’s 65 plus, what work is it going to be required in those first few years of ownership to get it where you want it to be.

RS: If I’m a potential buyer, be it I work in the firm or an external accounting firm, wouldn’t I be looking for those revenue streams where they are less efficient so that I can increase their efficiencies versus going in and paying top dollar for something that’s already full optimised?

KR: Both – both a bit of a journey and can be sometimes just as exciting. It really comes down to, as I said, every deal I’ve been involved in or transaction in the accounting space has been completely different.

RS: But then if – if it is very unique each individual transaction, is it hard then to come up with some rules of thumb?

KR: You know, I – I think you have to be very, very careful trying to keep rules of thumb in this space at the moment. Because it’s distorted via the activity of buyers, I’m seeing people pay well over the odds for things I wouldn’t actually even list or represent because there’s a frenzy around at the moment in the entry I’ve got to get scale, I’ve got to, you know, bulk up a bit and that’s causing I think at the moment, distorted valuations.

There’s ten buyers for every one and there’s no need to publicise, we have a readymade book of people willing and vetted as – as quality buyers.

JVD: Is – is the shortage of supply of vendors related to the fact that, because I mean we’re – we’re looking at an effective tsunami of baby boomers exiting professional services and attempting to retire in the next 10 years. So I’m just wondering if – if a lot of those guys just haven’t prepared their businesses effectively in order to exit, is that – is that where the shortfall is lying?

KR: I think the big thing is the – a good percentage of practitioners will die at their desk. And – and that’s reality a lot of the old buggers won’t go. And it’s frustrating for younger team members and I think the biggest block to succession in the accounting industry is that the boomer phenomenon is coming but – and there’s a wave as you say, it’s an [army], but I think that the pressures the suburban guys that probably haven’t put any time into succession will simply see their client list drop off to a point where okay, I can’t pay the rent anymore, I’ll write a letter to what’s left and say “It’s been a nice journey”.

JVD: So say you’re looking at three to five years to retirement, what are the things that you need to prepare and – and more or less in what order do you suggest people focus on them?

KR: I think the very first thing is work out your timeframe. I think in that process you need to work out, you know, the how, the when and the why…

JVD: Yeah.

KR: I think second to that is can you afford it? And to that point I mean what do we need to do financially, you know, get your – your house in order financially with your super and you foresee your retirement and the life you will sort of want to life in retirement, what’s required, money-wise.

You know, and – and then I guess work out where the buyer is going to come from where is your likely buyer? Is it somebody down the street, is it – is it you’re going to roll into someone bigger in that merge to retire scenario, do we have a team member that’s willing to take on ownership and are they funded enough to do so.

RS: So if you’re thinking about buying into the firm in which you work at, what type of discussion should you be having with the equity partners?

KR: I think the key thing is about control and influence. So you’re only looking at a couple of decision makers in these suburban firms, one’s the owner and one’s maybe the – the manager that’s working towards this ownership and if I was that person, if I’m going to put money on the table and maybe buy out over a period of time, how much say do I have to get the very next day?

There’s a real reluctance of a lot of practitioners to let that control and management go and I had a meeting with a potential vendor recently and I said how much of client contact do your team have and they go “Oh no I do all the client contact”. I’m going well how – how is receiving a goodwill value on all this if – if everything walks out the door when you do.

You’ve got to really decide whether – whether the person that you’re going to transition out is going to allow you to take over the reins, are they going to pass on the baton in a way for you to make it a worthwhile process as opposed to just going down the street, starting on your own.

We’re starting to scratch the surface on – on things like crowd funding. And what’s to stop, you know, people coming together and saying, well we will help either a management buyout or someone with the skills, collectively or as an individual buy a business that has made money for a period of time, is like to make money for a period of time in the future and every quarter I get a return on that.

JVD: And so what are some of the strategies you’re looking at in terms of packaging that investment opportunity that you think might work in the Australian economy?

KR: Pulling together meaningful data now out of people’s cloud based accounting, is simpler than it’s ever been and probably more reliable.

I think if you start small and you make it really personal and then on the – on the back of that tell all the reasons why a group of investor type clients went away from bricks and mortar to something different and because of the human aspect to it, I think they will. I really think they will.

JVD: That’s a fascinating idea because you’d not only be able to offer capital, you can also offer some of those management smarts that a lot of people need to step up and become owners of their own business.

RS: And it’s a proven model, I mean we look at how many umbrella groups there are, just say for instance in the accounting industry where you do have those services and that knowhow being delivered to, you know, micro businesses.

KR: And, you know, that’s where the power of the network really comes. It doesn’t have to be all the time, but you bring them together and they share those experiences, and – and it grows from there. Last we looked in our data there was something like 3,000 cafes in Australia for sale and I’m sure we could find 50-100 quality people, you know, of all origins and of all sectors and of all ages that are worth backing into a – a business.

JVD: What are some of the other businesses where sort of exits are particularly complex. Like we’ve talked about accounting, you’ve mentioned cafes, certainly what are some of the other areas and industries where – where exiting is – is a challenge?

KR: Yeah, niche industries are obviously an issue because if you’re a niche provider your likely buyers are probably astute. What we’re also seeing geographically, Australia is a mining type country obviously, we all know that and they’re – that industry has a cycle. So non-industry people coming in and looking at businesses as an investment, they don’t – you know, it’s hard for them for that particular type of client as well because if you can’t even run that thing under management and make a profit, so the options for those people are either ride it out, look for a global person that can ride it out, or simply shut the door.

You’ve got to find the person and back the vision. You know, and I think that’s where if you see some of the guys that are floating around the country at the moment with big wads of cash are not deploying it and it’s probably good to see, willy-nilly, some are probably buying things they shouldn’t but however, the people we’re advising aren’t quick to part with cash on just getting in on anything, they’re trying to find quality operators with a vision and how are they helping those people drive those businesses forward?

RS: That’s great, so it’s an – it’s alignment of purpose and then helping them accelerate to get to their goals.

KR: It’s really important too and I think something has to change some time soon. Not too many business owners are thinking about the ready for sale process.

And – and we see it, our phone rings, someone says I want to sell my business. I go, “Oh that’s great, over the next three to five years we can do so much to get it right”.

They go, “no, no I’m going…”

RS: And as you said, it’s exactly like people thinking about their superfund. I mean they’re intrinsically related. You have to start thinking about your retirement; you have to start thinking about what you’re going to do with your nest egg in the business.

KR: Yeah, but people don’t realise that this is a process not an event, so from that example of the phone rings, and I go, “great we can have we can do so much” they go, “no I’m selling today” and no, well we can’t sell today, they go, “you don’t understand I’m totally over it. I’m out”. So what would be great is to maybe get professional bodies to start you know pushing down to the industry which is really our voice.

And I don’t know if people are really thinking about the follow on effect of disruption and – and – and I think there is an onus of responsibility that if you’re really going to shake things up, give your marketplace the ability to adapt with you, competition’s a good thing, there’s safety in numbers, before you just go and you know put people out of business because they’re now, you know, they’re now not relevant.

So we live in the most over-regulated country in the world. I love this place, but that shits me. But so compliance is not dead delivery is changing. I think the exciting part about it is it does now allow you to have a conversation with a business owner about the future rather than going, there’s your tax returns for the past.

RS: Yeah, well said.

Kev, thanks so much for your time it was a fascinating interview.

KR: Thanks guys.

JVD: Thanks for joining us Kev.

RS: Okay, there’s so much content in what Kev’s just delivered to us. Sorry. Okay, that’s an incredible conversation to have with Kev, there’s so much in there. Some of the things that I – I took out of it was, it’s a process, not an event so it’s very much to do with timing and doing it sooner rather than later. At the end of the day we’re not going to be able to work into old age, there is going to come a time we have to start thinking about this, so do it now.

JVD: And essentially get your house in order before you sell it, which is – it’s – it’s something that we’re – we’re familiar with in other realms of our lives and not necessarily as business owners.

RS: That’s right, and I think the – getting your house in order sooner rather than later, without doing any scaremongering, you know, when the market dynamics change and there are going to more sellers than buyers in a space it makes sense to get ahead of the curve.

JVD: Absolutely, absolutely. And the lovely thing too is the way Kev goes about it is – is – essentially he’s – he’s very inspired about the people he works with, he loves the people side of things as he said and – and I don’t know you don’t think of accounting necessarily as an inspiring industry but he’s really about changing people’s lives which is – which is lovely and fascinating to hear.

RS: Yeah, it does. He’s got a great sense of purpose and he’s quite optimistic around the sector as well, as am I, you know, compliance is changing obviously and the way it’s changing is via the delivery.